Fed Eyes Housing: Potential Economic Catastrophe?
This article was posted yesterday from NewMax.com. Once again, more gloom and doom. What nobody is talking about is the fact that the Fed keeps raising interest rates thus killing the housing boom that the low interest rates fueled for the previous several years. From my point of view, if the Fed really wants to avert the scenario described below, they could just start lowering interest rates again. What am I missing?- Mick Orton
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It has been well documented that the U.S. housing market is currently in the midst of a downturn.
June brought yet another monthly drop in sales of previously owned homes, and according to The Christian Science Monitor, that number has “fallen in all four major regions of the United States from a year ago, with nationwide sales volume down 9 percent, according to a report released Tuesday by the National Association of Realtors.”
Homebuilders are cutting back on housing starts, rising interest rates and stagnant or lower home prices are stopping people from spending their home equity, and ARM-holders are getting crushed by a sudden spike in mortgage payments.
Meanwhile, the Fed is monitoring the situation carefully to determine whether current housing retrenchment will stay moderate or devolve into a severe situation that could badly damage the economy.
While the Fed has raised rates 17 times to combat inflation, they realized the hikes would eventually affect housing, but Bloomberg’s John M. Berry points out that another development has only just become apparent.
“What has only become evident in recent months is that, perversely, the big decline in housing affordability – due to the combination of double-digit housing price increases year after year and higher mortgage-interest rates – would cause a surge in core inflation,” says Barry.
“Would-be homeowners – either priced out of the market or simply fearful that the value of a home purchased now could fall in coming months – are renting instead. As a result, rents of residences and the so-called owners' equivalent rent components of the consumer price index have shot up this year.”
Barry goes on to say that these components of the CPI are so critical that when they rose, they accounted for almost two-thirds of the percentage point rise in core CPI for the first six months of 2006.
Federal Reserve Chairman has insisted that the impact of housing on the economy has been “orderly,” and most economists seem to agree. While few see the housing slowdown spurring recession, some do expect that it will slow economic growth considerably.
“Economists at Merrill Lynch, for example, reckon that the dive in homebuilding alone could subtract a percentage point from overall gross domestic product in the third quarter, tugging GDP growth down to perhaps 2.5 percent, annualized, for that quarter,” says the Monitor.
But some are predicting far worse.
“… recession is a real possibility, in the view of Merrill Lynch's David Rosenberg. After the past 10 peaks in new-home starts by builders, an economy-wide slump has followed seven times. Housing starts, like home sales, peaked last summer.”
Editor's Note:
Contrary to what Bernanke says, he, the federal government, and politicians love insidious inflation. It is the easiest political way out of the massive private and public debt that hangs over the U.S. economy like an open noose. Go here now.
- Newsmax.com
posted by SFResidence.com @ 10:56 AM
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